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House of debt: The story of rising corporate debt

business Updated: Mar 31, 2016 14:46 IST
Vijay Mallya

Mallya’s Rs 9000 crore loan default is just the tip of a corporate debt distress iceberg. 72 companies with a total debt of Rs 5.53 lakh crore have not earned enough to make loan repayments in the past two years.(HT Archive)

Vijay Mallya’s Rs 9,000-crore loan default may have grabbed headlines, but the liquor baron’s troubles could well be the tip of a corporate debt distress iceberg.

72 corporate houses with a total debt of Rs 5.53 lakh crore have not earned enough to make their loan payments for the past two years, an HT analysis of companies listed on the Bombay Stock Exchange (BSE) revealed.

40 of the 72 companies with a total debt of Rs 2.94 lakh crore have failed to meet their interest payments for the past three years.

The top 5 debt-ridden companies owe a total of Rs 1.4 lakh crore among them. These include Adani Power (Rs 44,840) crore, Lanco (Rs 39,890 crore), GVK (Rs 25,062 crore), Suzlon Energy (Rs 18,035 crore) and Hindustan Construction Company (HCC) (Rs 12,170 crore).

Adani did not respond to emails sent by HT.

“The government is very clear that companies have to pay up debt. They have to offload their shares or sell some assets and repay some part of the loan before banks do restructuring,” a senior finance ministry official said.

The ability to repay debt is calculated by a metric known as interest cover (IC), which is the ratio of loan-related expenses (also called debt servicing) to a company’s gross profit — total revenues earned before taxes, interests or dividends.

If the loan and interest payment a company has to make is Rs 100, and it earns the same amount in gross profit, the IC is 1 (100 divided by 100).

If the gross profit is Rs 200, the IC is 2 (200 divided by 100).

So, a higher IC means more money in the company’s hands to pay interest and repay loans.

The HT analysis shows 72 companies showed an IC of less than 1 for more than two years. This means less money to make interest payments.

The analysis also shows that 60% of the stress assets are concentrated in metals and infrastructure companies.

This may be bad news for banks as these sectors account for 74% of their corporate loans.

Alarm bells were set off in February when 29 state-owned banks revealed that they wrote off Rs 1.14 lakh crore of bad debts between 2013 and 2015. The figure was much higher than previous years, which raised concerns that banks were losing grip on mounting bad corporate debt.

HT had earlier reported that “stressed” companies were not doing a good job of managing their original businesses. Foray into other business ventures also took a toll on their efficiency and ability to repay loans.

“For three years, Lanco Infratech is in the process of exploring multiple options like selling stakes in one or multiple completed projects and bringing in strategic partners in under-construction projects,” a Lanco spokesperson said. “Lanco Infratech is thus committed to bring down the debt level, infuse liquidity into the company and add value for stakeholders.”

“At GVK we are currently looking at various options for reducing our debt burden,” a GVK spokesperson said.

HCC did not respond to HT’s requests for comments.

“Suzlon has taken various strategic initiatives and raised about `9,000 crore from the sale of its German subsidiary. These major initiatives have fixed our capital structure permanently and improvement is visible from our 2015-16 performance,” Suzlon Energy said.